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Why Small Businesses Need Budgets

Why Small Businesses Need Budgets

“Tips for creating a budget and sticking to it.”

 

Sixty-one percent of small businesses did not create an official formal budget in 2018, according to new data from Clutch, a B2B research firm in Washington, D.C. When small-businesses owners neglect creating budgets, they risk their businesses’ financial health and shortchange their potential. Clutch surveyed 302 small-business owners and managers to find out why they skipped the budgeting process and to get tips for sticking to a budget.

Small-business owners who forgo creating budgets do so for a variety of reasons, including:

• They think creating one will restrict them from being able to “do their own thing.”
• They think a budget will limit their growth potential by tying them down to a rigid structure.
• They fear that sticking to a budget will be impossible.

The truth is that not creating a budget may create more challenges for a business because budgeting accomplishes several things:

• Budgets help businesses focus. They keep everyone working toward the same goals and help scale the business.
• Budgets help businesses determine what their challenges are and how quickly they need to fix them.
• Budgets provide peace of mind.
• Budgets ease the process of monitoring finances and guide decision-making. For example, if your expenses go up one month, you’ll know why, and you can fix it the next month.
• Budgets provide a measuring stick with which to evaluate your performance against your growth goals.
• Sticking to a budget is doable. Following are some tips for doing so.

HOW TO STICK TO A BUDGET
 
1. Set budget goals, and keep an eye on them. Focus on accomplishing the budget goals you established, and don’t lose sight of them. Overreaching and stretching yourself too thin in terms of investment is a perfect recipe for failing to stick to your budget.
 
2. Review your financial performance every month. Don’t wait until the end of the quarter or the end of the year. By looking at your actual results versus your budget every 30 days, you can see if your business is missing the mark, and if it is, you’ll be able to see how and why and make timely adjustments – staying ahead of any potential budgetary disasters.
 
3. Think about how you record finances. Small businesses thrive and survive on cash flow, so think of your budget in terms of cash flow rather than linear expense projections; in other words, budget payments in the months when they are actually due. For example, do not budget an annual insurance premium payment into 12 monthly expenses; getting into a cash crunch when the annual insurance premium is due can have dire consequences.
 
4. Allow for a little flexibility in your budget. A budget cannot account for every cost that comes up, so allowing some wiggle room will enable you to navigate unexpected financial obstacles and is an essential part of budgeting. Too much rigidity is impractical.
 
5. Be ambitious but realistic. Don’t map out a budget that you can’t meet, but don’t underestimate possibilities. You should base each year’s budget on goals that you hope to reach during the budgeting period.

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